Fintech is key to building resilient food systems

The way natural resources have been extracted in most African countries has led to a lot of injustices, be it social, economic, political, gender, environmental, etc. Amid the climate change crisis, instead of bringing development the exploitation of fossils, land, and forest resources, for example, has often led to the displacement of local communities, loss of access to land/ water, loss of food security, etc. among African livelihoods. This has recently been exacerbated by the recent global energy crisis, which has led to a hike in the prices of food, oil, and other basic commodities. The long-term solution to these challenges lies in focusing investments on massive transformations in Africa’s food and energy production systems. Decision-makers in the public and private sector financial institutions need to ensure that financial flows from their institutions do not undermine the need for a just energy and/ or agrarian transition.

Scaling up agrarian-related solutions to global crises like climate change not only requires knowledge about their costs but also knowledge about their financing options. While traditional funding mechanisms may help, more inclusive options to accelerate Africa’s agrarian transition lie in financial technologies- FinTech. FinTech is an industry that makes use of digital technology innovations to facilitate the provision of financial services to clients through mobile phones/ computers using the internet or cards linked to secure digital payment systems. Examples of these technologies include the internet, cloud services, smartphones, machine learning, digital ID, and Application Programming Interfaces (APIs). FinTech has disrupted many business processes almost in every sector, and this has been accelerated by the Covid-19 pandemic. Its importance comes not only from the fact that it enables traditional financial institutions to function more efficiently but also from its ability to modify traditional financial services/ products and create new ones.

Under traditional business mechanisms, some groups of the economy e.g. farmers, especially in developing countries, suffer funding deficiencies, capital issues, and limited access to financial institutions, resulting in their exclusion from formal financial markets and services. Farmers have generally been considered to be un-bankable by the traditional financial institutions, due to market failures such as poorly defined property rights, information asymmetry, and the transaction costs of reaching out to them, among other factors. FinTech has the potential to meet the demands of farmers thus, addressing financial inclusion, which goes beyond just owning a bank account to (i) having access to credit/ a loan to finance a business; (ii) being able to conveniently make payments and send/ receive money; and (iii) being able to insure assets/ belongings. This post discusses the role of FinTech in driving new services/ products in credit, payments, and risk markets, for a sustainable agrarian transition. FinTech companies are characterized by the use of modern technologies to develop and provide financial services to customers. They focus on the underserved markets of the economy e.g. low-income individuals in highly concentrated markets, areas with few banks per capita, areas where the local economy is not performing well, and rural areas.

Credit

Access to credit for small-scale farmers and other agribusiness practitioners can be enhanced through crowdfunding- an entrepreneurial finance mechanism that permits the raising of funds from a crowd of investors through online platforms. Through crowdfunding, investors use their smartphones to select agricultural products to invest in from a wide range of agricultural commodities. In Congo, an android-app-powered crowdfunding platform called AgriZoom is promoting entrepreneurship and helping farmers, the fishing communities, and agro-processors to raise funds and access markets.Crowdfunding has also delivered notable results in countries like Nigeria, South Africa, Kenya, and Mali as evidence shows that agribusiness SMEs and small-scale farmers managed to finance their ventures from it. The model is not peculiar or entirely new to Africa as it has been (and is still being) used to raise funds for artists, charity, and other social causes from the public. It is becoming a more popular method of financing agriculture and it provides African countries a great opportunity to develop their agricultural sectors, especially in cases where farmers have limited access to services from the banking sector.

Digital Payments/ Transfers  

Most of the transactions across the agricultural value chains in rural areas occur through informal channels which are typically slow, costly, risky, and unreliable. By providing services to the otherwise marginalized populations and making the payments and money transfer processes quicker, cheaper, and simpler, FinTech is revolutionizing agricultural value chains in African countries. Telecommunications companies are leading in providing clients with digital platforms for transferring money/ making payments using smartphone applications. For example, there is MPESA- Africa’s largest and most successful FinTech platform which has active agents operating in Kenya, Tanzania, DRC, Ghana, Lesotho, Egypt, and Mozambique. In other cases, commercial banks are digitalizing/ partnering with start-up firms that provide FinTech packages to expand their financial services to the banked and unbanked parts of the population by offering branchlessbanking services. Evidence from the adoption and utilization of these innovations indicates that FinTech has the potential to stimulate growth and transform agribusiness in SSA.

Mobile phones also provide farmers with access to information about input/ output markets, prices, business opportunities, etc. through digital marketplaces, thus improving spatial arbitrage. A digital marketplace is a platform that connects stakeholders in agribusiness such as input/ equipment suppliers, investors, landowners, farmers, distributors, consumers, etc., directly in a single platform of the mobile market, with fewer intermediaries. An example of a successful digital marketplace in Africa is Hello Tractor, also known as the ‘Uber of tractors’ which operates in Kenya, Nigeria, and Mozambique. Hello Tractor allows farm equipment owners and farmers (in need of services/ equipment) to interact and transact through a digital interface. African agriculture is the least mechanized globally, and farmers under-cultivate their land and continue to be trapped in the cycle of poverty. By providing mechanization services through digital marketplaces, Hello Tractor has managed to increase the productivity and food security of many farmers in Africa, thus breaking the poverty cycle.

Micro-Insurance

Agricultural incomes are subject to substantial shocks, particularly when farming is rain-fed; making issues of risks and insurance very important. Assessing losses is an expensive process for insurers and historically, conventional/ traditional insurance models have suffered from issues of adverse selection and moral hazard. As a result, they offer premiums that are generally high and expensive to low-income individuals and those in rural communities, e.g. farmers. Digital insurance services like index-based insurance systems allow farmers to access affordable insurance packages to de-risk their enterprises and build their resilience to climate-related shocks. Technological innovations used in this case include remote satellite sensing and picture-based monitoring of crop/ livestock health. Index insurance models find a cheaply collectible proxy for the covariate shock that is inherent in agriculture e.g. rainfall/ area yields and insure only the component of variation correlated with this index. Therefore, it becomes easier for the insurer to provide micro-insurance contracts profitably, without challenges from adverse selection or moral hazard. When an index exceeds a certain threshold, the farmers receive fast and efficient insurance pay-outs through digital payment features on their smartphones. Several pilot studies have been done across Africa to increase awareness of index-based insurance services as a promising innovation that provides protection for small-scale farmers and agribusiness practitioners and helps increase their productivity and food security. Uptake of the product has increased in recent years but it is still insufficient to make the product commercially viable.   

Conclusion

Like in many other industries, digital technology is a game-changer in the agricultural sector. By providing basic financial services to the unbanked, and making payments/ money transfer processes simpler, quicker, and cheaper, FinTech has managed to address the challenge of financial inclusion, especially in developing countries where the playing field for those in urban and rural areas is unlevelled. And through its financial services like crowdfunding, digital marketplaces, digital insurance, and many others, FinTech has the opportunity to become the much-needed ‘support system’ for a sustainable agrarian transition in Africa, and it can help the agricultural sector of African countries to compete in global markets.

Author : Olga Mapanje

Research Fellow , African Centre for a Green Economy